In the early 1990s, drug companies began raising prices sharply for safety net health care providers, partly in response to the Medicaid drug rebate program’s creation in 1990. Congress enacted 340B in 1992 to help ease some of this pressure on these providers. It said that, if a drug company wanted its products to continue to be eligible for Medicaid reimbursement, it would have to agree to charge certain safety net health care providers no more than a statutorily defined ceiling price for drugs provided on an outpatient basis. This requirement is codified as Section 340B of the Public Health Service Act.

Initially, 10 types of federal health care grantees were made eligible for 340B, as were certain disproportionate share hospitals (DSHs). These hospitals receive additional Medicare payments to cover the cost of treating large volumes of low-income patients. Congress, under control of both parties, subsequently expanded 340B to include five other types of safety net hospitals, including certain free-standing children’s and cancer hospitals, critical access hospitals (CAHs), rural referral centers (RRCs) and sole community hospitals (SCHs). (Click here for the complete list.)

Under federal guidelines, eligible providers (“covered entities”) may dispense or administer 340B-discounted outpatient drugs only to individuals who are “patients” of the entity. For an individual to be an eligible patient, the following conditions must be met:

(1) the covered entity has established a relationship with the individual, such that the covered entity maintains records of the individuals’ health care; and (2) the individual receives health care services from a professional which is either employed by the covered entity or provides health care under contractual or other arrangement (e.g. referral for consultation) such that responsibility for the care provided remains with the covered entity; and (3) with respect to federal grantees, the individual receives a health care service from the covered entity which is consistent with the services for which the grant funding or other federal benefit has been provided to the entity (the third criterion does not apply to hospitals).

Also, under federal law, drug companies are protected from providing a discounted 340B price and a Medicaid drug rebate on the same drug (“a duplicate discount”).

Manufacturers have always had the power to audit safety net health care providers to make sure they do not cause the companies to pay duplicate discounts or that the providers did not “divert” drugs to ineligible patients. The Health Resources and Services Administration (HRSA), the agency that administers 340B, began to conduct its own audits of covered entities in 2012.

Safety net health care providers, meanwhile, lack the right to audit drug companies to learn if they are being overcharged or being denied 340B pricing on eligible outpatient drugs. A 2006 study by the U.S. Department of Health and Human Services (HHS) Inspector General found that drug companies overcharged 340B entities for 14 percent of their 340B drug purchases during the survey period. HRSA has the power to audit drug manufacturers, but has never used it. In fact, Congress has directed HHS to conduct selective audits of manufacturers, but the agency has yet to do so. In addition, many of the billion-dollar fraud settlements that the U.S. Department of Justice has negotiated with drug manufacturers included charges that the companies overbilled 340B safety net health care providers.